UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(mark one)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2009

o		TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from                      to                     

, Inc.

 

(Exact name of registrant as specified in its charter)

Tennessee		62-1812853
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
211 Commerce Street, Suite 300, Nashville, Tennessee		37201
(Address of principal executive offices)		(Zip Code)

(615) 744-3700

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changes since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).

Yes o     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No þ

As of April 24, 2009 there were 24,062,995 shares of common stock, $1.00 par value per share, issued and outstanding.

 

 

Pinnacle Financial Partners, Inc.
Report on Form 10-Q
March 31, 2009

TABLE OF CONTENTS

		Page No.
PART I — Financial Information:
Item 1. Consolidated Financial Statements (Unaudited)			2
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures about Market Risk			42
Item 4. Controls and Procedures			42
PART II — Other Information:
Item 1. Legal Proceedings			43
Item 1A. Risk Factors			43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			43
Item 3. Defaults Upon Senior Securities			43
Item 4. Submission of Matters to a Vote of Security Holders			43
Item 5. Other Information			43
Item 6. Exhibits			43
Signatures			44
EX-31.1
EX-31.2
EX-32.1
EX-32.2

FORWARD-LOOKING STATEMENTS

Pinnacle Financial Partners, Inc. (“Pinnacle Financial”) may from time to time make written or oral statements, including statements contained in this report which may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The words “expect,” “anticipate,” “likely,” “intend,” “plan,” “believe,” “seek,” “estimate” and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical information may also be considered forward-looking. All forward-looking statements are subject to risks, uncertainties and other facts that may cause the actual results, performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements. Such factors include, without limitation, (i) deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses, (ii) continuation of the historically low short-term interest rate environment, (iii) the inability of Pinnacle Financial to continue to grow its loan portfolio at historic rates in the Nashville-Davidson-Murfreesboro-Franklin MSA and the Knoxville MSA, (iv) rapid fluctuations or unanticipated changes in interest rates, (v) the development of any new market other than Nashville or Knoxville, (vi) a merger or acquisition, (vii) any activity in the capital markets that would cause Pinnacle Financial to conclude that there was impairment of any asset including intangible assets, (ix) the deterioration in carrying amounts of impaired assets and other real estate and (x) changes in state and Federal legislation, regulations or policies applicable to Banks and other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy. A more detailed description of these and other risks is contained in Pinnacle Financial’s most recent annual report on Form 10-K. Many of such factors are beyond Pinnacle Financial’s ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this release, whether as a result of new information, future events or otherwise.

Item 1. Part I. Financial Information

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)

		March 31,				December 31,
		2009				2008
ASSETS
Cash and noninterest-bearing due from banks		$	47,708,780			$	68,388,961
Interest-bearing due from banks			82,793,738				8,869,680
Federal funds sold			22,789,662				12,994,114
Cash and cash equivalents			153,292,180				90,252,755
Securities available-for-sale, at fair value			857,932,392				839,229,428
Securities held-to-maturity (fair value of $10,740,109 and $10,642,973 at March 31, 2009 and December 31, 2008, respectively)			10,539,910				10,551,256
Mortgage loans held-for-sale			24,651,088				25,476,788
Loans			3,473,959,457				3,354,907,269
Less allowance for loan losses			(45,334,073	)			(36,484,073	)
Loans, net			3,428,625,384				3,318,423,196
Premises and equipment, net			68,855,561				68,865,221
Other investments			35,139,980				33,616,450
Accrued interest receivable			17,752,634				17,565,141
Goodwill			244,120,021				244,160,624
Core deposits and other intangible assets			16,112,670				16,871,202
Other real estate			19,816,743				18,305,880
Other assets			75,312,868				70,756,823
Total assets		$	4,952,151,431			$	4,754,074,764
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing		$	451,418,417			$	424,756,813
Interest-bearing			380,384,416				375,992,912
Savings and money market accounts			717,265,116				694,582,319
Time			2,201,890,175				2,037,914,307
Total deposits			3,750,958,124				3,533,246,351
Securities sold under agreements to repurchase			209,590,988				184,297,793
Federal Home Loan Bank advances and other borrowings			221,642,376				201,966,181
Federal funds purchased			397,000				71,643,000
Subordinated debt			97,476,000				97,476,000
Accrued interest payable			9,327,196				8,326,264
Other liabilities			31,113,517				29,820,779
Total liabilities			4,320,505,201				4,126,776,368
Stockholders’ equity:
Preferred stock, no par value; 10,000,000 shares authorized; 95,000 shares issued and outstanding at March 31, 2009, and December 31, 2008			88,607,989				88,348,647
Common stock, par value $1.00; 90,000,000 shares authorized; 24,060,703 issued and outstanding at March 31, 2009 and 23,762,124 issued and outstanding at December 31, 2008			24,060,703				23,762,124
Common stock warrants			6,696,804				6,696,804
Additional paid-in capital			418,216,850				417,040,974
Retained earnings			85,380,063				84,380,447
Accumulated other comprehensive income, net of taxes			8,683,821				7,069,400
Total stockholders’ equity			631,646,230				627,298,396
Total liabilities and stockholders’ equity		$	4,952,151,431			$	4,754,074,764

See accompanying notes to consolidated financial statements.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

		Three Months Ended
		March 31,
		2009				2008
Interest income:
Loans, including fees		$	38,525,745			$	45,392,162
Securities:
Taxable			9,087,687				4,637,277
Tax-exempt			1,474,654				1,351,037
Federal funds sold and other			430,240				780,917
Total interest income			49,518,326				52,161,393
Interest expense:
Deposits			17,733,785				21,085,633
Securities sold under agreements to repurchase			360,787				832,053
Federal Home Loan Bank advances and other borrowings			2,723,502				2,884,586
Total interest expense			20,818,074				24,802,272
Net interest income			28,700,252				27,359,121
Provision for loan losses			13,609,535				1,591,123
Net interest income after provision for loan losses			15,090,717				25,767,998
Noninterest income:
Service charges on deposit accounts			2,476,951				2,573,737
Investment services			854,103				1,268,248
Insurance sales commissions			1,305,209				1,063,663
Gain on loan sales, net			1,287,772				656,088
Gain on investment sales, net			4,346,146				—
Trust fees			657,708				505,000
Other noninterest income			2,207,634				2,300,667
Total noninterest income			13,135,523				8,367,403
Noninterest expense:
Salaries and employee benefits			14,751,049				13,866,737
Equipment and occupancy			4,235,328				4,276,273
Foreclosed real estate expense			700,595				60,904
Marketing and other business development			439,516				375,871
Postage and supplies			830,138				648,340
Amortization of intangibles			758,533				766,033
Merger related expense			—				3,105,763
Other noninterest expense			3,527,865				2,391,737
Total noninterest expense			25,243,024				25,491,658
Income before income taxes			2,983,216				8,643,743
Income tax expense			893,008				2,578,953
Net income		$	2,090,208			$	6,064,790
Preferred stock dividends			1,187,500				—
Accretion on preferred stock discount			259,342				—
Net income available to common stockholders		$	643,366			$	6,064,790
Per share information:
Basic net income per common share available to common stockholders		$	0.03			$	0.27
Diluted net income per common share available to common stockholders		$	0.03			$	0.26
Weighted average shares outstanding:
Basic			23,510,994				22,331,398
Diluted			24,814,408				23,484,754

See accompanying notes to consolidated financial statements.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)

																														Accumulated
																		Common				Additional								Other				Total
		Preferred Stock								Common Stock								Stock				Paid-in				Retained				Comprehensive				Stockholders’
		Shares				Amount				Shares				Amount				Warrants				Capital				Earnings				Income (Loss)				Equity
Balances, December 31, 2007			—				—				22,264,817			$	22,264,817				—			$	390,977,308			$	54,150,679			$	(782,510	)		$	466,610,294
Cumulative effect of change in accounting principle due to adoption of EITF 06-4, net of tax			—				—				—				—				—				—				(598,699	)			—				(598,699	)
Exercise of employee common stock options, stock appreciation rights, common stock warrants and related tax benefits			—				—				62,073				62,073				—				623,276				—				—				685,349
Issuance of restricted common shares pursuant to 2004 Equity Incentive Plan, net of forfeitures			—				—				140,373				140,373				—				(140,373	)			—				—				—
Compensation expense for restricted shares			—				—				—				—				—				(32,641	)			—				—				(32,641	)
Compensation expense for stock options			—				—				—				—				—				514,582				—				—				514,582
Comprehensive income:
Net income			—				—				—				—				—				—				6,064,790				—				6,064,790
Net unrealized holding gains on securities available-for-sale, net of deferred tax benefit of $2,404,397			—				—				—				—				—				—				—				3,914,758				3,914,758
Total comprehensive income																																			9,979,548
Balances, March 31, 2008			—				—				22,467,263			$	22,467,263				—			$	391,942,152			$	59,616,770			$	3,132,248			$	477,158,433
Balances, December 31, 2008			95,000			$	88,348,647				23,762,124			$	23,762,124			$	6,696,804			$	417,040,974			$	84,380,447			$	7,069,400			$	627,298,396
Exercise of employee common stock options, stock appreciation rights, common stock warrants and related tax benefits			—				—				50,485				50,485				—				570,131				—				—				620,616
Issuance of restricted common shares, net of forfeitures			—				—				249,078				249,078				—				(249,078	)			—				—				—
Restricted shares withheld for taxes			—				—				(984	)			(984	)			—				(20,239	)			—				—				(21,223	)
Compensation expense for restricted shares			—				—				—				—				—				440,748				—				—				440,748
Compensation expense for stock options			—				—				—				—				—				434,314				—				—				434,314
Accretion on preferred stock dividend			—				259,342				—				—				—				—				(259,342	)			—				—
Preferred dividends paid			—				—				—				—				—				—				(831,250	)			—				(831,250	)
Comprehensive income:
Net income			—				—				—				—				—				—				2,090,208				—				2,090,208
Net unrealized holding gains on securities available-for-sale, net of deferred tax benefit of $1,006,524			—				—				—				—				—				—				—				1,614,421				1,614,421
Total comprehensive income																																			3,704,629
Balances, March 31, 2009			95,000			$	88,607,989				24,060,703			$	24,060,703			$	6,696,804			$	418,216,850			$	85,380,063			$	8,683,821			$	631,646,230

See accompanying notes to consolidated financial statements.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Three months ended
		March 31,
		2009				2008
Operating activities:
Net income		$	2,090,208			$	6,064,790
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization/accretion of premium/discount on securities			699,726				182,563
Depreciation and amortization			2,650,715				1,112,113
Provision for loan losses			13,609,535				1,591,123
Gain on loan sales			(1,287,772	)			(656,088	)
Gain on investment sales, net			(4,346,146	)			—
Stock-based compensation expense			875,062				481,941
Deferred tax (benefit) expense			(3,749,584	)			1,487,344
Losses on foreclosed real estate and other investments			390,390				44,262
Net gains on sale of premises			(7,899	)			—
Excess tax benefit from stock compensation			(40,595	)			(50,299	)
Mortgage loans held for sale:
Loans originated			(191,052,542	)			(61,526,765	)
Loans sold			192,931,675				59,757,305
Increase in other assets			1,135,420				228,836
Increase (decrease) in other liabilities			2,293,669				(257,260	)
Net cash provided by operating activities			16,191,862				8,459,865
Investing activities:
Activities in securities available-for-sale:
Purchases			(267,868,777	)			(57,529,865	)
Sales			201,221,131				—
Maturities, prepayments and calls			45,514,061				65,224,367
Activities in securities held-to-maturity:
Maturities, prepayments and calls			—				15,750,000
Increase in loans, net			(128,853,928	)			(119,667,223	)
Purchases of premises and equipment and software			(1,679,977	)			(2,603,806	)
Other investments			(1,603,900	)			(1,486,800	)
Net cash used in investing activities			(144,579,098	)			(100,313,327	)
Financing activities:
Net increase in deposits			217,854,751				42,735,290
Net increase in securities sold under agreements to repurchase			25,293,195				15,115,628
Net decrease in Federal funds purchased			(71,246,000	)			(39,668,000	)
Advances from Federal Home Loan Bank:
Issuances			35,000,000				70,000,000
Payments			(15,284,031	)			(3,336,883	)
Preferred dividends paid			(831,250	)			—
Exercise of common stock options and stock appreciation rights			599,401				739,855
Excess tax benefit from stock compensation			40,595				50,299
Net cash provided by financing activities			191,426,661				85,636,189
Net decrease in cash and cash equivalents			63,039,425				(6,217,273	)
Cash and cash equivalents, beginning of period			90,252,755				122,503,863
Cash and cash equivalents, end of period		$	153,292,180			$	116,286,590

See accompanying notes to consolidated financial statements.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Summary of Significant Accounting Policies

     Nature of Business — Pinnacle Financial Partners, Inc. (Pinnacle Financial) is a bank holding company whose primary business is conducted by its wholly-owned subsidiary, Pinnacle National Bank (Pinnacle National). Pinnacle National is a commercial bank headquartered in Nashville, Tennessee. Pinnacle National provides a full range of banking services in its primary market areas of the Nashville-Davidson-Rutherford-Franklin, Tennessee and Knoxville, Tennessee Metropolitan Statistical Areas.

     In addition to Pinnacle National, Pinnacle Financial, for the time period following its merger with Mid-America Bancshares, Inc. (“Mid-America”) on November 30, 2007 through February 29, 2008, conducted banking operations through the two banks formerly owned by Mid-America: PrimeTrust Bank in Nashville, Tennessee and Bank of the South in Mt. Juliet, Tennessee.

     Basis of Presentation — The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles. All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods covered by the report have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with the Pinnacle Financial consolidated financial statements and related notes appearing in the 2008 Annual Report previously filed on Form 10-K.

     These consolidated financial statements include the accounts of Pinnacle Financial and its wholly-owned subsidiaries. PNFP Statutory Trust I, PNFP Statutory Trust II, PNFP Statutory Trust III, PNFP Statutory Trust IV and Collateral Plus, LLC, are affiliates of Pinnacle Financial and are included in these consolidated financial statements pursuant to the equity method of accounting. Significant intercompany transactions and accounts are eliminated in consolidation.

     Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses.

     Cash Flow Information —Supplemental cash flow information addressing certain cash payments and noncash transactions for each of the three months ended March 31, 2009 and 2008 was as follows:

		For the three months ended March 31,
		2009				2008
Cash Payments:
Interest		$	19,999,896			$	25,035,879
Income taxes			—				—
Noncash Transactions:
Loans charged-off to the allowance for loan losses			4,852,185				757,276
Loans foreclosed upon with repossessions transferred to other real estate			4,838,298				2,855,967
Net unrealized holding gains on available-for-sale securities, net of deferred tax benefit			1,614,421				3,914,758

     Income Per Common Share — Basic net income per share available to common stockholders (“EPS”) is computed by dividing net income available to common stockholders by the weighted average common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted. The difference between basic and diluted weighted average shares outstanding was attributable to common stock options, common stock appreciation rights, warrants and restricted shares. The dilutive effect of outstanding options, common stock appreciation rights, warrants and restricted shares is reflected in diluted EPS by application of the treasury stock method.

     As of March 31, 2009, there were 2,171,000 stock options and 11,000 stock appreciation rights outstanding to purchase common shares. As of March 31, 2008, there were 2,457,000 stock options and 14,000 stock appreciation rights outstanding to purchase common shares. Most of these options and stock appreciation rights have exercise prices and compensation costs

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

attributable to current services, which when considered in relation to the average market price of Pinnacle Financial’s common stock, are considered dilutive and are considered in Pinnacle Financial’s diluted income per share calculation for the three months ended March 31, 2009 and 2008. There were common stock options of 1,015,000 and 481,000 outstanding as of March 31, 2009 and 2008, respectively, which were considered anti-dilutive and thus have not been considered in the fully-diluted earnings per share calculations below. Additionally, as of March 31, 2009 and 2008, Pinnacle Financial had outstanding warrants to purchase 345,000 and 395,000, respectively, of common shares which have been considered in the calculation of Pinnacle Financial’s diluted earnings per share for the three months ended March 31, 2009 and 2008. At March 31, 2009, Pinnacle Financial had outstanding warrants to purchase 534,910 shares of common stock associated with the U.S. Treasury Capital Purchase Program (the “CPP”), which warrants were considered anti-dilutive and thus have not been considered in the fully-diluted share calculations below.

     The following is a summary of the basic and diluted earnings per share calculations for the three months ended March 31, 2009 and 2008:

		For the three months ended
		March 31,
		2009				2008
Basic earnings per share calculation:
Numerator — Net income available to common stockholders		$	643,366			$	6,064,790
Denominator — Average common shares outstanding			23,510,994				22,331,398
Basic net income per share available to common stockholders		$	0.03			$	0.27
Diluted earnings per share calculation:
Numerator — Net income available to common stockholders		$	643,366			$	6,064,790
Denominator — Average common shares outstanding			23,510,994				22,331,398
Dilutive shares contingently issuable			1,303,414				1,153,356
Average diluted common shares outstanding			24,814,408				23,484,754
Diluted net income per share available to common stockholders		$	0.03			$	0.26

Recently Adopted Accounting Pronouncements

     Split-Dollar Life Insurance Arrangements — Pinnacle Financial acquired Cavalry Banking, Inc. in March of 2006. Certain executives and directors of Cavalry Banking, Inc. were participants in a deferred compensation arrangement which included split-dollar life insurance arrangements. In September 2006, the Financial Accounting Standards Board (“FASB”) ratified the consensuses reached by the Emerging Issues Task Force (“EITF”) on Issue No. 06-4 (EITF 06-4) “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” The EITF concluded that deferred compensation or postretirement benefit aspects of an endorsement split-dollar life insurance arrangement should be recognized as a liability by the employer and the obligation is not effectively settled by the purchase of a life insurance policy. The effective date was for fiscal years beginning after December 15, 2007. On January 1, 2008, Pinnacle Financial accounted for this EITF as a change in accounting principle and recorded a liability of $985,000 along with a corresponding adjustment of $598,699 to beginning retained earnings, net of tax.

     Share-Based Payment — In December 2007, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) 110, “Share-Based Payment.” SAB 110 allows eligible public companies to continue to use a simplified method for estimating the expense of stock options if their own historical experience is not sufficient to provide a reasonable basis. Under SAB 107, “Share-Based Payment,” the simplified method was scheduled to expire for all grants made after December 31, 2007. The SAB describes disclosures that should be provided if a company is using the simplified method for all or a portion of its stock option grants beyond December 31, 2007. The provisions of this bulletin were effective on January 1, 2008. Pinnacle Financial continues to use the simplified method allowed by SAB 110 for determining the expected term component for share options granted during 2009.

     Fair Value Measurement — In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157 (“SFAS 157”), “Fair Value Measurements.” SFAS 157, which defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 applies only to fair-value measurements that are already required or permitted by other accounting standards and is expected to increase the consistency of those measurements. The

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

definition of fair value focuses on the exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not the entry price, i.e., the price that would be paid to acquire the asset or received to assume the liability at the measurement date. The statement emphasizes that fair value is a market-based measurement; not an entity-specific measurement. Therefore, the fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. The effective date for SFAS No. 157 was for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Pinnacle Financial adopted SFAS 157 effective January 1, 2008 for financial assets and liabilities and effective January 1, 2009 for non financial assets and liabilities pursuant to Financial Statement Position (FSP) FAS 157-2.

     In February of 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities”, which gives entities the option to measure eligible financial assets and financial liabilities at fair value, on an instrument by instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability. Subsequent changes in fair value must be recorded in earnings. This statement was effective as of January 1, 2008; however, it had no impact on the consolidated financial statements of Pinnacle Financial because Pinnacle Financial did not elect the fair value option for any financial instrument not presently being accounted for at fair value.

     In October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.” This FSP clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP was effective for Pinnacle Financial upon issuance, including prior periods for which financial statements have not been issued; and, therefore was effective for Pinnacle Financial’s financial statements as of and for the year ended December 31, 2008. Adoption of FSP No. FAS 157-3 did not have a significant impact on Pinnacle Financial’s financial position or results of operations.

     Pinnacle Financial has an established process for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, fair value is based upon internally developed models or processes that use primarily market-based or independently-sourced market data, including interest rate yield curves, option volatilities and third party information. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. Furthermore, while Pinnacle Financial believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Valuation Hierarchy

     SFAS 157 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

	•		Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
	•		Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
	•		Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement.

     A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Following is a description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Assets

     Securities — Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government securities and certain other products. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows and are classified within Level 2 of the valuation hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

     Mortgage loans held-for-sale — Mortgage loans held-for-sale are carried at the lower of cost or fair value and are classified within level 2 of the valuation hierarchy. The inputs for valuation of these assets are based on the anticipated sales price of these loans as the loans are usually sold within a few weeks of their origination.

     Impaired loans — A loan is considered to be impaired when it is probable Pinnacle Financial will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the impaired loan exceeds the measure of fair value, a valuation allowance may be established as a component of the allowance for loan losses. Impaired loans are classified within Level 3 of the hierarchy.

     Other investments — Included in other investments are investments in certain nonpublic private equity funds. The valuation of nonpublic private equity investments requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such assets. These investments are valued initially based upon transaction price. The carrying values of other investments are adjusted either upwards or downwards from the transaction price to reflect expected exit values as evidenced by financing and sale transactions with third parties, or when determination of a valuation adjustment is confirmed through ongoing reviews by senior investment managers. A variety of factors are reviewed and monitored to assess positive and negative changes in valuation including, but not limited to, current operating performance and future expectations of the particular investment, industry valuations of comparable public companies, changes in market outlook and the third-party financing environment over time. In determining valuation adjustments resulting from the investment review process, emphasis is placed on current company performance and market conditions. These investments are included in Level 3 of the valuation hierarchy.

     Other real estate — Other real estate, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. Gains or losses on sale and any subsequent adjustments to the value are recorded as a component of foreclosed real estate expense.

     Other assets — Included in other assets are certain assets carried at fair value, including the cash surrender value of bank owned life insurance policies and interest rate swap agreements. The carrying amount of the cash surrender value of bank owned life insurance is based on information received from the insurance carriers indicating the financial performance of the policies and the amount Pinnacle Financial would receive should the policies be surrendered. Pinnacle Financial reflects these assets within Level 3 of the valuation hierarchy. The carrying amount of interest rate swap agreements is based on information obtained from a third party bank. Pinnacle Financial reflects these assets within Level 2 of the valuation hierarchy.

Liabilities

     Other liabilities — Pinnacle Financial has certain liabilities carried at fair value including certain interest rate swap agreements. The fair value of these liabilities is based on information obtained from a third party bank and is reflected within Level 2 of the valuation hierarchy.

     The following table presents the financial instruments carried at fair value as of March 31, 2009, by caption on the consolidated balance sheets and by SFAS 157 valuation hierarchy (as described above) (dollars in thousands):

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Assets and liabilities measured at fair value on a recurring basis as of March 31, 2009

										Internal models				Internal models
		Total carrying				Quoted market				with significant				with significant
		value in the				prices in an active				observable market				unobservable market
		consolidated				market				parameters				parameters
		balance sheet				(Level 1)				(Level 2)				(Level 3)
Securities available-for-sale		$	857,932			$	—			$	853,085			$	4,847
Mortgage loans held-for-sale			24,651				—				24,651				—
Other investments			1,557				—				—				1,557
Other assets			64,507				—				17,163				47,343
Total assets at fair value		$	948,647			$	—			$	894,899			$	53,747
Other liabilities		$	17,327			$	—			$	17,327			$	—
Total liabilities at fair value		$	17,327			$	—			$	17,327			$	—

Assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2009

										Internal models				Internal models
		Total carrying				Quoted market				with significant				with significant
		value in the				prices in an active				observable market				unobservable market
		consolidated				market				parameters				parameters
		balance sheet				(Level 1)				(Level 2)				(Level 3)
Other real estate		$	19,817			$	—			$	—			$	19,817
Impaired loans			55,413				—				—				55,413
Total assets at fair value		$	75,230			$	—			$	—			$	75,230

     Changes in level 3 fair value measurements

     The table below includes a rollforward of the balance sheet amounts for the three months ended March 31, 2009 (including the change in fair value) for financial instruments classified by Pinnacle Financial within level 3 of the valuation hierarchy for assets and liabilities measured at fair value on a recurring basis. When a determination is made to classify a financial instrument within level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since level 3 financial instruments typically include, in addition to the unobservable or level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Three months ended March 31, 2009 (in thousands)		Assets				Liabilities
Fair value, January 1, 2009		$	85,464			$	—
Total realized and unrealized gains included in income			144				—
Purchases, issuances and settlements, net			60				—
Transfers in and/or out of level 3			(31,921	)			—
Fair value, March 31, 2009		$	53,747			$	—
Total unrealized gains included in income related to financial assets and liabilities still on the consolidated balance sheet at March 31, 2009		$	144			$	—

Note 2. Participation in U.S. Treasury Capital Purchase Program and Private Placement of Common Stock

     On December 12, 2008, Pinnacle Financial issued 95,000 shares of preferred stock to the U.S. Treasury for $95 million pursuant to the CPP. Additionally, Pinnacle Financial issued warrants to purchase 534,910 shares of common stock to the U.S. Treasury as a condition to its participation in the CPP. The warrants have an exercise price of $26.64 each and are immediately exercisable and expire 10 years from the date of issuance. Proceeds from this sale of the preferred stock are expected to be used for general corporate purposes, including supporting the continued, anticipated growth of Pinnacle National. The CPP preferred stock is non-voting, other than having class voting rights on certain matters, and pays cumulative dividends quarterly at a rate of 5% per annum for the first five years and 9% thereafter. Pinnacle Financial can redeem the preferred shares issued to the U.S. Treasury under the CPP at any time subject to a requirement that it must consult with its primary federal regulator before redemption.

     Management used a cost of capital model to calculate the fair value of the Series A preferred stock issued to the U.S. Treasury in connection with the CPP. The cost of capital model involved estimating a reasonable return for a similar $95 million capital investment in Pinnacle Financial. The model incorporated a risk free rate (Long Term U.S. Treasury bond rate) added to a market premium for Pinnacle Financial’s common stock. For the market premium for Pinnacle Financial’s common stock, Pinnacle Financial multiplied its beta factor as reported on the Nasdaq Global Select Markets’ website as of December 11, 2008 by 5% (the result of which was the estimated market risk premium). Additionally, due to the relatively small size of the offering, Pinnacle Financial added an additional risk premium of 2.3% to the total. The result was a cost of capital calculation of 8.3%. Pinnacle Financial believed 8.3% was a reasonable after-tax return to an investor who might be willing to acquire a $95 million interest in Pinnacle Financial. Pinnacle Financial then forecasted the cash outflows of the preferred stock issuance at the 5% dividend rate assuming a terminal payment of $95 million five years from issuance prior to the dividend payment rate’s increase from 5% to 9%. Using a discounted cash flow model with a discount rate of 8.3%, the result was a fair value for the Series A preferred stock of $83.7 million.

     The fair value of the common stock warrants issued in tandem with the Series A preferred stock was determined to be approximately $6.3 million. The fair value of the Series A preferred stock and the fair value of the common stock warrants were summed and the initial carrying amounts for the Series A preferred stock and the common stock warrants were calculated based on an allocation of the two fair value components. The aggregate fair value result for both the Series A preferred stock and the common stock warrants was calculated to be $90.0 million, with 7% of this aggregate total allocated to the warrants and 93% allocated to the Preferred Stock. As a result of this allocation, the $95 million issuance resulted in the warrants having a value of $6.7 million and the Series A preferred stock having an initial value of $88.3 million.

     Management calculated the accretion amount of the Series A preferred stock discount using the effective interest method which resulted in an effective rate of 6.51%. That is, to accrete the $6.7 million discount on the Series A preferred stock over the next five years on an effective interest method resulted in a calculation of 6.51% for the five year period. The $6.7 million will be accreted as a reduction in net income available for common shareholders over the next five years at approximately $1.1 million to $1.3 million per year. The fair value of the common stock warrants as of December 12, 2008 was estimated using the Black-Scholes option pricing model and the following assumptions:

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Risk free interest rate			2.64	%
Expected life of warrants		10 years
Expected dividend yield			0.00	%
Expected volatility			30.3	%
Weighted average fair value		$	11.86

     Pinnacle Financial’s computation of expected volatility is based on weekly historical volatility since September of 2002. The risk free interest rate of the warrants were based on the closing market bid for U.S. Treasury securities corresponding to the expected life of the common stock warrants in effect at the time of grant.

Note 3. Securities

     The amortized cost and fair value of securities available-for-sale and held-to-maturity at March 31, 2009 and December 31, 2008 are summarized as follows:

		March 31, 2009
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Securities available-for-sale:
U.S. Treasury securities		$	—			$	—			$	—			$	—
U.S. government agency securities			201,162,936				2,603,051				293,904				203,472,083
Mortgage-backed securities			493,166,631				11,752,741				50,366				504,869,006
State and municipal securities			144,528,076				2,550,317				2,373,407				144,704,986
Corporate notes and other			5,143,675				2,262				259,620				4,886,317
		$	844,001,318			$	16,908,371			$	2,977,297			$	857,932,392
Securities held-to-maturity:
U.S. government agency securities		$	1,998,051			$	21,449			$	—			$	2,019,500
State and municipal securities			8,541,859				251,822				73,072				8,720,609
		$	10,539,910			$	273,271			$	73,072			$	10,740,109

		December 31, 2008
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Securities available-for-sale:
U.S. Treasury securities		$	—			$	—			$	—			$	—
U.S. Government agency securities			62,861,379				1,561,974				—				64,423,353
Mortgage-backed securities			626,414,161				12,140,209				197,086				638,357,284
State and municipal securities			136,727,876				1,454,803				3,357,443				134,825,236
Corporate notes			1,907,722				3,785				287,952				1,623,555
		$	827,911,138			$	15,160,771			$	3,842,481			$	839,229,428
Securities held-to-maturity:
U.S. government agency securities		$	1,997,967			$	5,593			$	—			$	2,003,560
State and municipal securities			8,553,289				172,589				86,465				8,639,413
		$	10,551,256			$	178,182			$	86,465			$	10,642,973

     During the three months ended March 31, 2009, Pinnacle Financial realized approximately $5.92 million in net gains and $1.57 million in net losses from the sale of $201 million of available-for-sale securities. At March 31, 2009, approximately $744.2 million of Pinnacle Financial’s investment portfolio was pledged to secure public funds and other deposits and securities sold under agreements to repurchase.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     At March 31, 2009 and December 31, 2008, included in securities were the following investments with unrealized losses. The information below classifies these investments according to the term of the unrealized losses of less than twelve months or twelve months or longer:

		Investments with an Unrealized								Investments with an Unrealized								Total Investments with an
		Loss of less than 12 months								Loss of 12 months or longer								Unrealized Loss
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
At March 31, 2009:
U.S. government agency securities		$	11,985,000			$	293,904			$	—			$	—			$	11,985,000			$	293,904
Mortgage-backed securities			2,828,868				49,454				46,316				911				2,875,184				50,365
State and municipal securities			46,413,633				2,075,645				11,269,243				370,835				57,682,876				2,446,480
Corporate notes			3,120,077				259,620				—				—				3,120,077				259,620
Total temporarily-impaired securities		$	64,347,578			$	2,678,623			$	11,315,559			$	371,746			$	75,663,137			$	3,050,369
At December 31, 2008:
U.S. government agency securities		$	—			$	—			$	—			$	—			$	—			$	—
Mortgage-backed securities			29,622,695				119,315				2,520,127				77,771				32,142,822				197,086
State and municipal securities			28,560,915				1,095,573				32,466,087				2,348,335				61,027,002				3,443,908
Corporate notes			242,520				157,480				859,475				130,472				1,101,995				287,952
Total temporarily-impaired securities		$	58,426,130			$	1,372,368			$	35,845,689			$	2,556,578			$	94,271,819			$	3,928,946

     Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of Pinnacle Financial to retain its investment in the issue for a period of time sufficient to allow for any anticipated recovery in fair value. Because the declines in fair value noted above were primarily attributable to increases in interest rates rather than credit quality and because Pinnacle Financial has the ability and intent to hold all of these investments until a market price recovery or maturity, the impairment of these investments is not deemed to be other-than-temporary.

Note 4. Loans and Allowance for Loan Losses

     The composition of loans at March 31, 2009 and December 31, 2008 is summarized in the table below.

		At March 31,				At December 31,
		2009				2008
Commercial real estate — Mortgage		$	1,010,308,516			$	963,530,444
Consumer real estate — Mortgage			710,266,617				675,605,596
Construction and land development			674,397,576				658,798,934
Commercial and industrial			968,126,507				966,562,521
Consumer and other			110,860,241				90,409,774
Total Loans			3,473,959,457				3,354,907,269
Allowance for loan losses			(45,334,073	)			(36,484,073	)
Loans, net		$	3,428,625,384			$	3,318,423,196

     Changes in the allowance for loan losses for the three months ended March 31, 2009 and for the year ended December 31, 2008 are as follows:

		March 31, 2009				December 31, 2008
Balance at beginning of period		$	36,484,073			$	28,470,207
Charged-off loans			(4,852,185	)			(5,133,274	)
Recovery of previously charged-off loans			92,650				1,933,597
Provision for loan losses			13,609,535				11,213,543
Balance at end of period		$	45,334,073			$	36,484,073

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     At March 31, 2009, Pinnacle Financial had certain impaired loans of $55,413,000 of which $33,863,000 were on nonaccruing interest status. At December 31, 2008, Pinnacle Financial had certain impaired loans of $10,860,000 of which all were on nonaccruing interest status. In each case, at the date such loans were placed on nonaccrual status, Pinnacle Financial reversed all previously accrued interest income against current year earnings. Had nonaccruing loans been on accruing status, interest income would have been higher by $690,000 and $482,000 for the three months ended March 31, 2009 and March 31, 2008, respectively.

     Potential problem loans, which are not included in nonperforming assets, amounted to approximately $88.9 million at March 31, 2009 compared to $27.8 million at December 31, 2008. Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by the Office of the Comptroller of the Currency, Pinnacle National’s primary regulator, for loans classified as substandard, excluding the impact of nonperforming loans. The large increase in potential problem loans was caused by the downgrade of additional residential construction and development loans and one $21.55 million loan to a one-bank holding company.

     At March 31, 2009, Pinnacle Financial had granted loans and other extensions of credit amounting to approximately $36,000,000 to directors, executive officers, and their related entities, of which $28,570,000 had been drawn upon. During the three months ended March 31, 2009, $1,826,000 of loan and other commitment increases and $876,000 of principal and other reductions were made by directors, executive officers, and their related entities. The terms on these loans and extensions are on substantially the same terms customary for other similarly situated persons for the type of loan involved. None of these loans to directors, executive officers, and their related entities were impaired at March 31, 2009.

     At March 31, 2009, Pinnacle Financial had $24.7 million of mortgage loans held-for-sale compared to $25.5 million at December 31, 2008. These loans are marketed to potential investors prior to closing the loan with the borrower such that there is an agreement for the subsequent sale of the loan between the eventual investor and Pinnacle Financial prior to the loan being closed with the borrower. Pinnacle Financial sells loans to investors on a loan-by-loan basis and has not entered into any forward commitments with investors for future loan sales. All of these loan sales transfer servicing rights to the buyer. During the three months ended March 31, 2009 Pinnacle Financial recognized $1,522,000 in gains on the sale of these loans compared to $652,000, in the first quarter of 2008.

     At March 31, 2009, Pinnacle Financial owned $19,817,000 in other real estate which had been acquired, usually through foreclosure, from borrowers compared to $18,306,000 at December 31, 2008. Substantially all of these amounts relate to homes and residential development projects that are either completed or are in various stages of construction for which Pinnacle Financial believes it has adequate collateral.

Note 5. Income Taxes

     Pinnacle Financial’s income tax expense differs from the amounts computed by applying the Federal income tax statutory rates of 35% to income before income taxes. A reconciliation of the differences for the three months ended March 31, 2009 and 2008 is as follows:

		March 31, 2009				March 31, 2008
Income taxes at statutory rate		$	1,044,126			$	3,025,310
State tax (benefit) expense, net of Federal tax effect			8,950				(14,857	)
Federal tax credits			(24,134	)			(57,625	)
Tax-exempt securities			(128,133	)			(296,618	)
Bank owned life insurance			(18,302	)			(81,097	)
Insurance premiums			(23,464	)			(63,184	)
Other items			33,965				67,024
Income tax expense		$	893,008			$	2,578,953

     The effective tax rate for 2009 and 2008 is impacted by Federal tax credits related to the New Markets Tax Credit program whereby a subsidiary of Pinnacle National has been awarded approximately $2.3 million in future Federal tax credits which are available through 2010. Tax benefits related to these credits will be recognized for financial reporting purposes in the same periods that the credits are recognized in the Company’s income tax returns. The credit that is available for the years ending December 31, 2009 and for the year ended December 31, 2008 is $360,000. Pinnacle Financial believes that it will comply with the various regulatory provisions of the New Markets Tax Credit program, and therefore has reflected the impact of the credits in its estimated annual effective tax rate for 2009 and 2008.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 6. Commitments and Contingent Liabilities

     In the normal course of business, Pinnacle Financial has entered into off-balance sheet financial instruments which include commitments to extend credit (i.e., including unfunded lines of credit) and standby letters of credit. Commitments to extend credit are usually the result of lines of credit granted to existing borrowers under agreements that the total outstanding indebtedness will not exceed a specific amount during the term of the indebtedness. Typical borrowers are commercial concerns that use lines of credit to supplement their treasury management functions, thus their total outstanding indebtedness may fluctuate during any time period based on the seasonality of their business and the resultant timing of their cash flows. Other typical lines of credit are related to home equity loans granted to consumers. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee.

     Standby letters of credit are generally issued on behalf of an applicant (our customer) to a specifically named beneficiary and are the result of a particular business arrangement that exists between the applicant and the beneficiary. Standby letters of credit have fixed expiration dates and are usually for terms of two years or less unless terminated beforehand due to criteria specified in the standby letter of credit. A typical arrangement involves the applicant routinely being indebted to the beneficiary for such items as inventory purchases, insurance, utilities, lease guarantees or other third party commercial transactions. The standby letter of credit would permit the beneficiary to obtain payment from Pinnacle Financial under certain prescribed circumstances. Subsequently, Pinnacle Financial would then seek reimbursement from the applicant pursuant to the terms of the standby letter of credit.

     Pinnacle Financial follows the same credit policies and underwriting practices when making these commitments as it does for on-balance sheet instruments. Each customer’s creditworthiness is evaluated on a case-by-case basis, and the amount of collateral obtained, if any, is based on management’s credit evaluation of the customer. Collateral held varies but may include cash, real estate and improvements, marketable securities, accounts receivable, inventory, equipment, and personal property.

     The contractual amounts of these commitments are not reflected in the consolidated financial statements and would only be reflected if drawn upon. Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. However, should the commitments be drawn upon and should our customers default on their resulting obligation to us, Pinnacle Financial’s maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments.

     A summary of Pinnacle Financial’s total contractual amount for all off-balance sheet commitments at March 31, 2009 is as follows:

Commitments to extend credit		$	1,008,274,000
Standby letters of credit			95,300,000

     At March 31, 2009, the fair value of Pinnacle Financial’s standby letters of credit was $109,000. This amount represents the unamortized fee associated with these standby letters of credit and is included in the consolidated balance sheet of Pinnacle Financial. This fair value will decrease over time as the existing standby letters of credit approach their expiration dates.

     Various legal claims also arise from time to time in the normal course of business. In the opinion of management, the resolution of these claims outstanding at March 31, 2009 will not have a material impact on Pinnacle Financial’s financial statements.

     Visa Litigation — Pinnacle National is a member of the Visa USA network. Under Visa USA bylaws, Visa members are obligated to indemnify Visa USA and/or its parent company, Visa, Inc. (Visa), for potential future settlement of, or judgments resulting from, certain litigation, which Visa refers to as the “covered litigation.” Pinnacle National’s indemnification obligation is limited to its membership proportion of Visa USA. On November 7, 2007, Visa announced the settlement of its American Express litigation, and disclosed in its annual report to the SEC on Form 10-K for the year ended September 30, 2007 that Visa had accrued a contingent liability for the estimated settlement of its Discover litigation. Accordingly, Pinnacle National expensed and recognized a contingent liability in the amount of $145,000 as an estimate for its membership proportion of the American Express settlement and the potential Discover settlement, as well as its membership proportion of the amount that Pinnacle National estimates will be required for Visa to settle the remaining covered litigation. During the fourth quarter of 2008, Pinnacle National expensed and recognized an additional $28,000 contingent liability for the revised estimated settlement of Visa’s Discover litigation.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     Visa completed an initial public offering (IPO) in March 2008. Visa used a portion of the proceeds from the IPO to establish a $3.0 billion escrow for settlement of covered litigation and used substantially all of the remaining portion to redeem class B and class C shares held by Visa issuing members. During the three months ended March 31, 2008, Pinnacle Financial recognized a pre-tax gain of $140,000 on redemption proceeds received from Visa, Inc. and reversed $63,000 of the $145,000 litigation expense recognized as its pro-rata share of the $3.0 billion escrow funded by Visa, Inc. The timing for ultimate settlement of all covered litigation is not determinable at this time.

Note 7. Stock Options, Stock Appreciation Rights and Restricted Shares

     Pinnacle Financial has two equity incentive plans. Additionally, Pinnacle Financial has acquired equity plans in connection with acquisitions of Cavalry and Mid-America under which it has granted stock options to its employees to purchase common stock at or above the fair market value on the date of grant and granted restricted share awards to employees and directors. At March 31, 2009, there were 273,860 shares available for issue under these plans.

     During the first quarter of 2006 and in connection with its merger with Cavalry Bancorp, Inc. (“Cavalry”), Pinnacle Financial assumed a third equity incentive plan, the 1999 Cavalry Bancorp, Inc. Stock Option Plan (the “Cavalry Plan”). All options granted under the Cavalry Plan were fully vested prior to Pinnacle Financial’s merger with Cavalry and expire at various dates between January 2011 and June 2012. In connection with the merger, all options to acquire Cavalry common stock were converted to options to acquire Pinnacle Financial’s common stock at the 0.95 exchange ratio. The exercise price of the outstanding options under the Cavalry Plan was adjusted using the same exchange ratio. All other terms of the Cavalry options were unchanged. At March 31, 2009, there were 195,551 Pinnacle Financial shares which could be acquired by the participants in the Cavalry Plan at exercise prices that ranged between $10.26 per share and $13.68 per share.

     On November 30, 2007 and in connection with its merger with Mid-America, Pinnacle Financial assumed several equity incentive plans, including the Mid-America Bancshares, Inc. 2006 Omnibus Equity Incentive Plan (the “Mid-America Plans”). All options and stock appreciation rights granted under the Mid-America Plans were fully vested prior to Pinnacle Financial’s merger with Mid-America and expire at various dates between June 2011 and July 2017. In connection with the merger, all options and stock appreciation rights to acquire Mid-America common stock were converted to options or stock appreciation rights, as applicable, to acquire Pinnacle Financial common stock at the 0.4655 exchange ratio. The exercise price of the outstanding options and stock appreciation rights under the Mid-America Plans was adjusted using the same exchange ratio with the exercise price also being reduced by $1.50 per share. All other terms of the Mid-America options and stock appreciation rights were unchanged. There were 487,835 Pinnacle Financial shares which could be acquired by the participants in the Mid-America Plan at exercise prices that ranged between $6.63 per share and $21.37 per share. At March 31, 2009, there were 67,356 shares available for issue under the Mid-America Plans, which shares may only be issued to Pinnacle associates that were Mid-America associates prior to the merger.

Common Stock Options and Stock Appreciation Rights

     As of March 31, 2009, of the approximately 2,170,944 stock options and 10,671 stock appreciation rights outstanding, 1,215,599 options were granted with the intention to be incentive stock options qualifying under Section 422 of the Internal Revenue Code for favorable tax treatment to the option holder while 955,345 options would be deemed non-qualified stock options or stock appreciation rights and thus not subject to favorable tax treatment to the option holder. All stock options granted under the Pinnacle Financial equity incentive plans vest in equal increments over five years from the date of grant and are exercisable over a period of ten years from the date of grant. All stock options and stock appreciation rights granted under the Cavalry Plan and Mid-America Plans were fully vested at the date of those mergers.

     A summary of the activity within the equity incentive plans during the three months ended March 31, 2009 and information regarding expected vesting, contractual terms remaining, intrinsic values and other matters was as follows:

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

										Weighted-
						Weighted-				Average				Aggregate
						Average				Contractual				Intrinsic
						Exercise				Remaining Term				Value (1)
		Number				Price				(in years)				(000’s)
Outstanding at December 31, 2008			2,232,100			$	17.41				5.99			$	28,310
Granted			—				—
Exercised (2)			(50,485	)			10.16
Forfeited			—				—
Outstanding at March 31, 2009			2,181,615			$	17.51				5.75			$	17,731
Outstanding and expected to vest as of March 31, 2009			2,149,496			$	17.35				5.72			$	17,720
Options exercisable at March 31, 2009 (3)			1,115,391			$	13.47				5.03			$	16,638

     During the three months ended March 31, 2009, 153,938 option awards vested at an average exercise price of $20.41 and an intrinsic value of approximately $2.6 million.

     As of March 31, 2009, there was approximately $4.8 million of total unrecognized compensation cost related to unvested stock options granted under our equity incentive plans. That cost is expected to be recognized over a weighted-average period of 2.95 years.

     During the three months ended March 31, 2009 and 2008, Pinnacle Financial recorded stock option compensation expense of $434,000 and $515,000, respectively, using the Black-Scholes valuation model for awards granted prior to, but not yet vested, as of January 1, 2006 and for awards granted after January 1, 2006. For these awards, Pinnacle Financial has recognized compensation expense using a straight-line amortization method. Stock-based compensation expense has been reduced for estimated forfeitures.

     There were no options granted in the first quarter of 2009. The fair value of options granted during the three month period ended March 31, 2008 was estimated using the Black-Scholes option pricing model and the following assumptions:

		2008
Risk free interest rate			3.20	%
Expected life of options		6.5 years
Expected dividend yield			0.00	%
Expected volatility			28.5	%
Weighted average fair value		$	7.76

     Pinnacle Financial’s computation of expected volatility is based on weekly historical volatility since September 2002. Pinnacle Financial used the simplified method in determining the estimated life of stock option issuances. The risk free interest rate of the award is based on the closing market bid for U.S. Treasury securities corresponding to the expected life of the stock option issuances in effect at the time of grant.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Restricted Shares

     Additionally, Pinnacle Financial’s 2004 Equity Incentive Plan and the Mid-America Plan provide for the granting of restricted share awards and other performance or market-based awards. There were no market-based awards outstanding as of March 31, 2009 under either of these plans. During the three months ended March 31, 2009, Pinnacle Financial awarded 262,273 shares of restricted common stock awards to certain Pinnacle Financial associates and outside directors.

     A summary of activity for unvested restricted share awards for the three months ended March 31, 2009 is as follows:

						Grant Date
						Weighted-
		Number				Average Cost
Unvested at December 31, 2008			231,881			$	24.76
Shares awarded			262,273				19.90
Restrictions lapsed and shares released to associates/directors			(27,474	)			24.16
Shares forfeited			(14,179	)			32.83
Unvested at March 31, 2009			452,501			$	21.72

     Status of 2009 Restricted Share Awards: There were 262,273 restricted share awards granted during the first quarter of 2009. The following discusses the current status of these awards:

	•		The forfeiture restrictions on 30,878 restricted share awards granted to executive management in 2009 lapse in three equal installments should Pinnacle Financial achieve certain earnings and soundness targets over each year of the subsequent three-year period (or, alternatively, the cumulative three-year period).
	•		The forfeiture restrictions on another 92,669 restricted share awards granted to executive management lapse in equal installments on the anniversary date of the grant over a 10 year period or until the associate is 65 years of age, whichever is earlier so long as Pinnacle Financial is profitable for that year.
	•		The forfeiture restrictions on 124,614 restricted share awards lapse in five equal installments on the anniversary date of the grant so long as Pinnacle Financial is profitable for that year.
	•		During the first quarter of 2009, 14,112 restricted share awards were issued to the outside members of the board of directors in accordance with their board compensation plan. Restrictions lapse on the one year anniversary date of the award based on each individual board member meeting their attendance goals for the various board and board committee meetings to which each member was scheduled to attend. Each non-employee board member received an award of 1,008 shares.

     Compensation expense associated with the performance based restricted share awards is recognized over the time period that the restrictions associated with the awards are anticipated to lapse based on a graded vesting schedule such that each traunche is amortized separately. Compensation expense associated with the time based restricted share awards is recognized over the time period that the restrictions associated with the awards lapse based on the total cost of the award. For the three months ended March 31, 2009, Pinnacle Financial recognized approximately $441,000 in compensation costs attributable to all restricted share awards issued prior to March 31, 2009.

Note 8. Other borrowings

     Pinnacle Financial has a loan agreement related to a $25 million line of credit with a regional bank. This line of credit is used to support the growth of Pinnacle National. The balance owed pursuant to this line of credit at March 31, 2009 was $18 million. The line of credit has a one year term, contains customary affirmative and negative covenants regarding the operation of our business, a negative pledge on the common stock of Pinnacle National and is priced at 30-day LIBOR plus 200 basis points. As of March 31, 2009, Pinnacle Financial was in violation of a covenant limiting the amount of nonperforming assets Pinnacle Financial could have at any quarterly reporting date. On April 23, 2009, Pinnacle Financial received a waiver of this covenant violation from the lender.

Note 9. Regulatory Matters

     Pinnacle National is subject to restrictions on the payment of dividends to Pinnacle Financial under federal banking laws and the regulations of the Office of the Comptroller of the Currency. Pinnacle Financial is also subject to limits on payment of dividends to its shareholders by the rules, regulations and policies of federal banking authorities and by its participation in the CPP. Pinnacle Financial has not paid any cash dividends since inception, and it does not anticipate that it will consider paying dividends until Pinnacle Financial generates sufficient capital through net income from operations to support both anticipated asset growth and dividend payments. During the three months ended March 31, 2009, Pinnacle National paid dividend payments of $1.2 million to Pinnacle Financial to fund Pinnacle Financial’s interest payments due on its subordinated indebtedness and an additional $1.2 million to Pinnacle Financial to fund Pinnacle Financial’s preferred stock dividend payable on the shares issued to the U.S. Treasury in the CPP. At March 31, 2009, pursuant to federal banking regulations, Pinnacle National had approximately $55.4 million of net retained profits from the previous two years available for future dividend payments to Pinnacle Financial.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     Pinnacle Financial and its banking subsidiary are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions, by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Pinnacle Financial and its banking subsidiary must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Pinnacle Financial’s and its banking subsidiary capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

     Quantitative measures established by regulation to ensure capital adequacy require Pinnacle Financial and Pinnacle National to maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets and of Tier I capital to average assets. Management believes, as of March 31, 2009, that Pinnacle Financial and Pinnacle National met all capital adequacy requirements to which they are subject. To be categorized as well-capitalized, Pinnacle National must maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. Pinnacle Financial’s and Pinnacle National’s actual capital amounts and ratios are presented in the following table (dollars in thousands):

																		Minimum
																		To Be Well-Capitalized
										Minimum								Under Prompt
										Capital								Corrective
		Actual								Requirement								Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
At March 31, 2009
Total capital to risk weighted assets:
Pinnacle Financial		$	510,242				13.34	%		$	306,047				8.0	%		not applicable
Pinnacle National		$	435,559				11.40	%		$	305,576				8.0	%		$	381,970				10.0	%
Tier I capital to risk weighted assets:
Pinnacle Financial		$	449,852				11.76	%		$	153,182				4.0	%		not applicable
Pinnacle National		$	375,169				9.82	%		$	152,788				4.0	%		$	229,182				6.0	%
Tier I capital to average assets (*):
Pinnacle Financial		$	449,852				9.74	%		$	184,649				4.0	%		not applicable
Pinnacle National		$	375,169				8.14	%		$	184,307				4.0	%		$	230,384				5.0	%

Note 10. Derivative Instruments

     Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For derivatives not designated as hedges, the gain or loss is recognized in current earnings. Pinnacle Financial enters into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. Upon entering into these instruments to meet customer needs, Pinnacle Financial enters into offsetting positions in order to minimize the risk to Pinnacle Financial. These swaps qualify as derivatives, but are not designated as hedging instruments.

     Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair value of a derivative instrument contract is positive, this generally indicates that the counter party or customer owes Pinnacle Financial, and results in credit risk to Pinnacle Financial. When the fair value of a derivative instrument contract is negative, Pinnacle Financial owes the customer or counterparty and therefore, has no credit risk.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     A summary of Pinnacle Financial’s interest rate swaps as of March 31, 2009 is included in the following table (in thousands):

		March 31, 2009
		Notional				Estimated Fair
		Amount				Value
Interest rate swap agreements:
Pay fixed / receive variable swaps		$	196,389			$	17,164
Pay variable / receive fixed swaps			196,389				(17,327	)
Total		$	392,778			$	(163	)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of our financial condition at March 31, 2009 and December 31, 2008 and our results of operations for the three months ended March 31, 2009 and 2008. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from the consolidated financial statements. The following discussion and analysis should be read along with our consolidated financial statements and the related notes included elsewhere herein.

Overview

General. Our rapid organic growth continues to have a material impact on Pinnacle Financial’s financial condition and results of operations in 2009 as compared to 2008. Our fully diluted net income per share for the three months ended March 31, 2009 and 2008 was $0.03 and $0.26, respectively. At March 31, 2009, loans totaled $3.474 billion, as compared to $3.355 billion at December 31, 2008, while total deposits increased to $3.751 billion at March 31, 2009 from $3.533 billion at December 31, 2008.

Results of Operations. Our net interest income increased to $28.7 million for the first three months of 2009 compared to $27.4 million for the first three months of 2008. The net interest margin (the ratio of net interest income to average earning assets) for the three months ended March 31, 2009 was 2.72% compared to 3.37% for the same period in 2008.

Our provision for loan losses was $13.6 million for the first three months of 2009 compared to $1.6 million for the same period in 2008. Impacting the provision for loan losses in any accounting period are several matters including the amount of loan growth during the period, the level of charge-offs or recoveries incurred during the period, the changes in the amount of impaired loans and the results of our quarterly assessment of the inherent risks of our loan portfolio. During the first quarter of 2009, we incurred net charge-offs of $4.8 million compared to $190,000 in the first quarter of 2008. Additionally, during the first quarter of 2009, we increased our allowance for loan losses from 1.09% at December 31, 2008 to 1.30% at March 31, 2009 due to these increased levels of charge-offs and nonperforming loans.

Noninterest income for the three months ended March 31, 2009 compared to the same period in 2008 increased by $4.8 million, or 57.0%. This increase was primarily due to our recording gains on the sale of investment securities of approximately $4.3 million as a result of restructuring of the bond portfolio. Excluding gains on the sale of investment securities, Pinnacle’s noninterest income increased by 5.0 percent between the first quarter of 2009 and the first quarter of 2008.

Our continued growth in 2009 resulted in increased noninterest expense compared to 2008 due to increases in salaries and employee benefits and other operating expenses. The number of full-time equivalent employees increased from 686.0 at March 31, 2008 to 736.0 at March 31, 2009. As a result, we experienced increases in compensation and employee benefit expense. We expect to add additional employees throughout 2009 which should also cause our compensation and employee benefit expense to increase in 2009. Additionally, our branch expansion efforts during the last few years and the addition of the new associates in 2009 will also increase noninterest expense. Our efficiency ratio (the ratio of noninterest expense to the sum of net interest income and noninterest income) was 60.3% for the first three months of 2009 compared to 71.4% for the same period in 2008.

The effective income tax expense rate for the three months ended March 31, 2009 was approximately 29.9%, compared to an effective income tax expense rate for the three months ended March 31, 2009 of approximately 29.8%.

Net income available for common stockholders for the first three months of 2009 was $0.6 million compared to $6.1 million for the same period in 2008, a decrease of 89.4%. Included in net income available to common stockholders was $1.43 million of charges related to preferred stock dividends and accretion of the preferred stock discount. As a result, net income was $2.1 million for the three months ended March 31, 2009, compared to $6.1 million for the three months ended March 31, 2008.

Financial Condition. Loans increased $119 million during the first three months of 2009. We have grown our total deposits to $3.751 billion at March 31, 2009 compared to $3.533 billion at December 31, 2008, an increase of $218 million. In comparing the composition of the average balances of our deposits between the first quarter of 2009 with the first quarter of 2008, we have

experienced increased growth in our higher cost certificate of deposit balances than in any other category. This increase in reliance on higher cost deposits has contributed to a reduced net interest margin between the two periods.

Capital and Liquidity. At March 31, 2009, our capital ratios, including our bank’s capital ratios, met regulatory minimum capital requirements. Additionally, at March 31, 2009, our bank would be considered to be “well-capitalized” pursuant to banking regulations. As our bank grows it may require additional capital from us over that which can be earned through operations. We anticipate that we will continue to use various capital raising techniques in order to support the growth of our bank.

During 2008, we increased our capital accounts through our participation in the U.S. Department of Treasury’s Capital Purchase Program (the “CPP”). As a result of our participation in the CPP, we issued 95,000 shares of preferred stock for $95 million. Additionally, we issued 534,910 common stock warrants to the U.S. Treasury as a condition to our participation in the CPP. The warrants have an exercise price of $26.64 each, are immediately exercisable and expire 10 years from the date of issuance. The common stock warrants have been assigned a fair value of $6.7 million as of December 12, 2008. As a result, $6.7 million has been recorded as the discount on the preferred stock issued in the CPP which will be accreted as a reduction in net income available for common stockholders over the next five years at approximately $1.1 million to $1.3 million per year. The resulting $88.3 million has been assigned to the Series A preferred stock issued in the CPP and will be accreted up to the redemption amount of $95 million over the next five years.

Additionally, during 2008, we sold one million shares of our common stock for $21.5 million which also increased our capital accounts. In the past, we have been successful in procuring additional capital from the capital markets (via public and private offerings of trust preferred securities and common stock). This additional capital was required to support our growth. As of March 31, 2009, we believe we have access to sufficient capital to support our current growth plans. However, expansion by acquisition of other banks or by branching into a new geographic market or by redemption of the preferred shares issued in connection with our participation in the CPP (which we may redeem at anytime subject to prior consultation with our primary federal regulator), could result in issuance of additional capital, including additional common shares.

Critical Accounting Estimates

The accounting principles we follow and our methods of applying these principles conform with U.S. generally accepted accounting principles and with general practices within the banking industry. In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance for loan losses and the assessment of impairment of the intangibles resulting from our mergers with Mid-America Bancshares, Inc. (“Mid-America”) and Cavalry Bancorp, Inc. (“Cavalry”) have been critical to the determination of our financial position and results of operations.

Allowance for Loan Losses (“allowance”). Our management assesses the adequacy of the allowance prior to the end of each calendar quarter. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The level of the allowance is based upon management’s evaluation of the loan portfolios, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loan losses are charged off when management believes that the full collectability of the loan is unlikely. A loan may be partially charged-off after a “confirming event” has occurred which serves to validate that full repayment pursuant to the terms of the loan is unlikely. Allocation of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, is deemed to be uncollectible.

Larger balance commercial and commercial real estate loans are impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due according to the contractual terms means that both the interest and principal payments of a loan will be collected as scheduled in the loan agreement.

An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan (recorded investment in the loan is the principal balance plus any accrued interest, net of deferred loan fees or costs and unamortized premium or discount). The impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate, or if the loan is collateral dependent, impairment measurement is based on the fair value of the collateral, less estimated disposal costs. Management believes it follows appropriate accounting and regulatory guidance in determining impairment and accrual status of impaired loans.

The level of allowance maintained is believed by management to be adequate to absorb probable losses inherent in the portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off.

In assessing the adequacy of the allowance, we also consider the results of our ongoing independent loan review process. We undertake this process both to ascertain whether there are loans in the portfolio whose credit quality has weakened over time and to assist in our overall evaluation of the risk characteristics of the entire loan portfolio. Our loan review process includes the judgment of management, the input from our independent loan reviewers, and reviews that may have been conducted by bank regulatory agencies as part of their usual examination process. We incorporate loan review results in the determination of whether or not it is probable that we will be able to collect all amounts due according to the contractual terms of a loan.

As part of management’s quarterly assessment of the allowance, management divides the loan portfolio into four segments: commercial, commercial real estate, consumer and consumer real estate. Each segment is then analyzed such that an allocation of the allowance is estimated for each loan segment.

The allowance allocation for commercial and commercial real estate loans begins with a process of estimating the probable losses inherent for these types of loans. The estimates for these loans are established by category and based on our internal system of credit risk ratings and historical loss data. The estimated loan loss allocation rate for our internal system of credit risk grades for commercial and commercial real estate loans is based on management’s experience with similarly graded loans, discussions with banking regulators and industry loss factors. During the year ended December 31, 2008, we also performed a migration analysis of all loans that were charged-off during the previous two years. A migration analysis assists in evaluating loan loss allocation rates for the various risk grades assigned to loans in our portfolio. We incorporated the migration analysis along with other factors to determine the loss allocation rates for the commercial and commercial real estate portfolios. Subsequently, we weighted the allocation methodologies for the commercial and commercial real estate portfolios and determined a weighted average allocation for these portfolios.

The allowance allocation for consumer and consumer real estate loans which includes installment, home equity, consumer mortgages, automobiles and others is established for each of the categories by estimating probable losses inherent in that particular category of consumer and consumer real estate loans. The estimated loan loss allocation rate for each category is based on management’s experience, consideration of our actual loss rates, industry loss rates and loss rates of various peer bank groups. Consumer and consumer real estate loans are evaluated as a group by category (i.e. retail real estate, installment, etc.) rather than on an individual loan basis because these loans are smaller and homogeneous. We weight the allocation methodologies for the consumer and consumer real estate portfolios and determine a weighted average allocation for these portfolios.

The estimated loan loss allocation for all four loan portfolio segments is then adjusted for management’s estimate of probable losses for several “environmental” factors. The allocation for environmental factors is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents estimated probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based upon quarterly trend assessments in delinquent and nonaccrual loans, unanticipated charge-offs, credit concentration changes, prevailing economic conditions, changes in lending personnel experience, changes in lending policies or procedures and other influencing factors. These environmental factors are considered for each of the four loan segments and the allowance allocation, as determined by the processes noted above for each component, is increased or decreased based on the incremental assessment of these various “environmental” factors.

The assessment also includes an unallocated component. We believe that the unallocated amount is warranted for inherent factors that cannot be practically assigned to individual loan categories. An example is the imprecision in the overall measurement process, in particular the volatility of the national and local economy.

We then test the resulting allowance by comparing the balance in the allowance to historical trends and industry and peer information. Our management then evaluates the result of the procedures performed, including the result of our testing, and concludes on the appropriateness of the balance of the allowance in its entirety. The audit committee of our board of directors reviews and approves the assessment prior to the filing of quarterly and annual financial information.

Impairment of Intangible Assets — Long-lived assets, including purchased intangible assets subject to amortization, such as our core deposit intangible asset, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its

estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.

Goodwill and intangible assets that have indefinite useful lives are evaluated for impairment annually and are evaluated for impairment more frequently if events and circumstances indicate that the asset might be impaired. That annual assessment date is September 30. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.

If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill.

Our stock price has historically traded above its book value per common share and tangible book value per common share and was trading above its book value per common share and tangible book value per common share as of March 31, 2009. In the event our stock price were to trade below its book value per common share and tangible book value per common share, we would perform our usual evaluation of the carrying value of goodwill as of the reporting date. Such a circumstance would be one factor in our evaluation that could result in an eventual goodwill impairment charge. Additionally, should our future earnings and cash flows decline and/or discount rates increase, an impairment charge to goodwill and other intangible assets may also be required.

Results of Operations

The following is a summary of our results of operations (dollars in thousands):

										2009-2008
		Three months ended								Percent
		March 31,								Increase
		2009				2008				(decrease)
Interest income		$	49,518			$	52,161				-5.1	%
Interest expense			20,818				24,802				-16.1	%
Net interest income			28,700				27,359				4.9	%
Provision for loan losses			13,610				1,591				755.4	%
Net interest income after provision for loan losses			15,090				25,768				-41.4	%
Noninterest income			13,136				8,367				57.0	%
Noninterest expense			25,243				25,491				-1.0	%
Net income before income taxes			2,983				8,644				-65.5	%
Income tax expense			893				2,579				-65.4	%
Net income			2,090				6,065				-65.5	%
Preferred dividends and preferred stock discount accretion			1,447				—
Net income available to common shareholders		$	643			$	6,065				-89.4	%
Basic net income per common share available to common stockholders		$	0.03			$	0.27				-88.9	%
Diluted net income per common share available to common stockholders		$	0.03			$	0.26				-88.5	%

Net Interest Income. Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest bearing liabilities and is the most significant component of our earnings. For the three months ended March 31, 2009 and 2008, we recorded net interest income of $28.7 million and $27.4 million respectively, which resulted in a net interest margin of 2.72% and 3.37%.

The following table sets forth the amount of our average balances, interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for total interest-earning assets and total interest-bearing liabilities, net interest spread and net interest margin for the three months ended March 31, 2009 and 2008 (dollars in thousands):

		Three months ended												Three months ended
(dollars in thousands)		March 31, 2009												March 31, 2008
		Average								Rates/				Average								Rates/
		Balances				Interest				Yields				Balances				Interest				Yields
Interest-earning assets:
Loans		$	3,416,462			$	38,526				4.57	%		$	2,761,745			$	45,392				6.61	%
Securities:
Taxable			716,317				9,088				5.15	%			367,125				4,637				5.12	%
Tax-exempt (1)			147,963				1,475				5.33	%			136,690				1,351				5.24	%
Federal funds sold and other			73,435				429				2.57	%			58,892				781				5.56	%
Total interest-earning assets			4,354,177				49,518				4.66	%			3,324,452				52,161				6.37	%
Nonearning assets
Intangible assets			260,729												258,807
Other nonearning assets			254,484												190,783
Total assets		$	4,869,390											$	3,774,042
Interest-bearing liabilities:
Interest bearing deposits
Interest checking		$	359,524			$	428				0.48	%		$	404,307			$	2,129				2.12	%
Savings and money market			715,704				1,940				1.10	%			735,899				4,098				2.24	%
Time			2,155,478				15,366				2.89	%			1,372,899				14,859				4.35	%
Total interest bearing deposits			3,230,706				17,734				2.23	%			2,513,105				21,086				3.37	%
Securities sold under agreements to repurchase			229,918				361				0.64	%			169,146				832				1.98	%
Federal Home Loan Bank advances and other borrowings			234,887				1,571				2.71	%			143,802				1,426				3.99	%
Subordinated debt			97,476				1,152				4.80	%			82,476				1,458				7.11	%
Total interest-bearing liabilities			3,792,987				20,818				2.23	%			2,908,529				24,802				3.43	%
Noninterest-bearing deposits			417,861				—				—				368,413				—				—
Total deposits and interest-bearing liabilities			4,210,848				20,818				2.01	%			3,276,942				24,802				3.04	%
Other liabilities			24,061												22,661
Stockholders’ equity			634,481												474,439
Total liabilities and stockholders’ equity		$	4,869,390											$	3,774,042
Net interest income						$	28,700											$	27,359
Net interest spread (2)											2.43	%											2.94	%
Net interest margin (3)											2.72	%											3.37	%